Sample Category Title

Cable almost fully reversed recovery from last Friday’s low at 1.3011, which stalled at 1.3090, as pound came under renewed pressure on concerns about Brexit.

Sterling fell to session low at 1.3020 before UK PM May addresses the parliament, on rising fears on strong criticism to May’s Brexit plan from opposition as well as from her own party.

Despite 95% of divorce plan has been agreed, Irish border problem is still unsolved and marks the main obstacle.

The pound could come under stronger pressure if May fails to convince the UK parliament to verify her plan, which could result in stronger bearish acceleration on sustained break below pivotal supports at 1.30 zone.

Daily techs show mixed signals from bearish setup of MA’s and positive momentum, with Brexit news expected to be pair’s key driver.

Res: 1.3060, 1.3090, 1.3102, 1.3127
Sup: 1.3012, 1.2993, 1.2944, 1.2921

Dollar's slight bullish bias keeps gold price at the back foot on Monday.

The yellow metal holds within multi-day congestion after several attempts above falling 100SMA (currently at $1224) failed to sustain break, but risk of reversal increases following multiple upside rejections which left several daily candles with long upper shadows and weakening daily studies.

Weakening momentum created bear cross and heads south, supporting the notion, but bearish scenario requires initial negative signal on break below rising 10SMA / congestion floor (1218), with confirmation of reversal expected on break below $1214/13 pivots (Fibo 38.2% of $1183/$1233 upleg / daily cloud top).

Conversely, close above 100SMA would revive hopes for fresh advance, which requires confirmation on sustained break above $1234 (weekly 200SMA).

Res: 1224, 1229, 1234, 1238
Sup: 1221, 1218, 1213, 1208

Monday October 22: Five things the markets are talking about

Global equities remain better supported this Monday morning after Chinese stocks surged overnight on senior officials verbal intervention.

The ‘mighty' U.S dollar has eased a tad along with treasuries, while Italian bonds have rallied.

The EUR had found some early support on the back of a ratings decision by Moody's Investors Service late last Friday who removed the immediate threat of a downgrade to ‘junk.' The market now awaits on S&P's review this Friday.

Nevertheless, risks remain, from tension surrounding the Khashoggi murder and the ongoing Sino-U.S trade showdown to Italian budget fears and President Trump's unpredictability ahead of U.S midterm elections.

On tap for this week, the Bank of Canada (BoC) is expected to increase its policy rate by +25 bps to +1.75% on Wednesday (Oct 24) despite last Friday's disappointing inflation and retail sales readings.

Elsewhere, the European Central Bank (ECB) is expected to leave policy unchanged, but questions regarding Italy and its budget issues are expected to be front and center.

In Scandinavia, Sweden's Riksbank and Norway's Norges bank take center stage mid-week.

Stateside, earnings season gathers pace with notable highlights including Amazon, Alphabet, Intel, Verizon, Microsoft, Twitter, McDonald's, and Caterpillar.

1. Stocks in the black

Japan's Nikkei edged higher, supported by a rally in Chinese stocks on the promise of additional stimulus measures, triggering buying in firms exposed to China. The Nikkei share average rallied +0.37%, moving off a six-week low hit during last Friday's session. The index is now down around -7.5% since hitting a 27-year high on Oct. 2. The broader Topix edged +0.15% higher.

Down-under, Aussie stocks ended lower on Monday, as political concerns rattled investors after the governing coalition looks set to lose its one-seat majority in parliament following a weekend by-election. The S&P/ASX 200 index closed -0.6% lower. In S. Korea, the Kospi stock index climbed on Monday supported by a strong Chinese market. The index rallied +0.5%.

In China, stocks surged overnight in the wake of coordinated statements of support by senior regulators, and as China prepares to overhaul its income tax law for individuals. The benchmark Shanghai Composite index was +4.2% higher, while the blue-chip CSI300 index jumped +4.4%.

The gains extended to Hong Kong, where the Hang Seng index added +2.3% and the China Enterprises Index ended +2.6% higher.

In Europe, indices trade higher across the board. Italy's FTSE MIB outperforms after Moody's cut the countries rating to the lowest investment grade, but put the outlook as stable, helping BTP futures rally.

U.S stocks are set to open in the ‘black' (+0.1%).

Indices: Stoxx600 +0.22% at 362.02, FTSE +0.26% at 7,066.00, DAX +0.52% at 11,614.01, CAC-40 +0.24% at 5,096.82, IBEX-35 +0.73% at 8,957.30, FTSE MIB +0.66% at 19,205.50, SMI +0.30% at 8,892.50, S&P 500 Futures +0.18%

2. Brent oil back above $80 as Iran sanctions loom

Brent crude oil prices remain better bid as markets are expected to tighten once U.S sanctions against Iran's crude exports come into effect in November.

Brent crude oil futures are at +$80.26 a barrel, up +48c, or +0.6%, above Friday's close. U.S West Texas Intermediate (WTI) crude futures are at +$69.60 a barrel, up +48c, or +0.7%.

Note: The U.S sanctions on Iran, the third-largest producer in OPEC, are set to start on Nov. 4.

OPEC agreed in June to boost supply to make up for the expected shortfall in Iranian exports, however, recent data suggests that OPEC is struggling to add barrels as an increase in Saudi supply was offset by declines elsewhere.

Nevertheless, relief may come from the U.S, where offshore drillers added four oilrigs in the week to Oct. 19, bringing the total count to 873, according to Baker Hughes data on Friday. After months of stagnation, U.S crude production is expected to rise.

However, undermining sentiment is weaker China growth data and the ongoing Sino-U.S trade dispute. The full impact of the trade war is expected to hit markets early next year and provide a considerable drag on oil demand.

Ahead of the U.S open, gold prices have edged higher overnight towards their three-month peak hit last week, as the ‘big' dollar eased and worries over rising political tensions slowing global economic growth lent support to the ‘yellow' metal. Spot gold is up +0.1% at +$1,226.52 an ounce, while U.S. gold futures are also up +0.1% at +$1,229.50 an ounce.

3. Italian yields drops by most in 4-months on Moody's decision

Italian sovereign yields dropped across the curve after ratings agency Moody's kept the country's sovereign ratings outlook ‘stable' while delivering an expected downgrade last week. The market was worried that the outlook would be ‘negative.'

Note: S&P's review is expected this Friday (Oct 26). It now rates the country two notches above junk at BBB.

Italy's five-year BTP yield dropped -36 bps to a two-week low of +2.63%, while the benchmark 10-year yield was -26.5 bps lower at +3.39%, its biggest daily drop in four-months. The BTP/Bund 10-year yield spread tightened to +284 bps.

Elsewhere, the yield on the U.S 10-year note rose +1 bps to +3.20%, while Germany's 10-year Bund yield increased + 2bps to +0.48%. In the U.K, the 10-year Gilt yield climbed +1 bps to +1.588%.

4. Dollar quiet across the board

The EUR/USD is a tad lower at €1.1515 after testing a high of €1.1550 overnight on the back of a relief rally in the 10-year BTP/Bund spread. Nevertheless, event risk persists ahead of the deadline for Italy to respond to the E.U Commission's initial objections over the 2019 budget plan.

Expect Thursday's ECB meeting to be closely watched, especially Draghi's press conference, where the market is looking for more color on how the ECB would reinvest maturing QE proceeds post December this year.

GBP/USD is -0.3% lower at £1.3030 as Brexit talks again reached an impasse. However, PM Theresa May believes that +95% of the Brexit withdrawal deal is “now settled.” It's believed that the PM is facing a rebellion by more than 40 Tory MP's if she does not back down to fresh demands from Brexiteers'

Note: 48 votes are necessary for a leadership challenge

5. Italy says it's ready to discuss budget with E.U authorities

The Italian government is ready to sit and discuss its budget targets with E.U, Deputy Prime Minister Luigi Di Maio said this morning, restating that the “populist” coalition had no plan to leave the euro.

Italy has sent a letter to the commission explaining its reasons for sticking to the +2.4% goal, and that the government was ready to “sit at the table”.

Note: Italy wants to hike its budget deficit to +2.4% from this year's +1.8%. Last week, the E.U Commission labeled Italy's 2019 draft budget an “unprecedented breach of EU fiscal rules.”

China's Shanghai SSE Composite closed sharply higher by 4.09% today to 2654.88. The two day rebound after hitting 2449.19 on climax selling suggests medium term bottoming. And, this year's down trend from 3587.03 has likely completed a five wave sequence to 2449.19.

That is, the index is now in medium consolidation phase that could last a few months. 2700 psychological level will be the hurdle to overcome. It's close to 2691.02 support turned resistance and 55 day EMA at 2721.67. Firm break of this level will pave the way to 38.2% retracement of 3587.03 to 2449.19 at 2883.84. We'd expect strong resistance from there to limit upside. If everything turns out as expected, the long term down trend should resume some time next year after consolidation completes.

UK Prime Minister Theresa May is set to tell the Parliament that Brexit agrement is now 95% done. But she also repeated her rejection of EU's proposal on Irish backstop.

In her prepared speech, May said "taking all of this together, 95 per cent of the Withdrawal Agreement and its protocols are now settled", referring to what she has achieved. And, "the shape of the deal across the vast majority of the Withdrawal Agreement is now clear."

However, on Irish border backstop, May said "As I set out last week, the original backstop proposal from the EU was one we could not accept, as it would mean creating a customs border down the Irish Sea and breaking up the integrity of the UK," She reiterated that "I do not believe that any UK Prime Minister could ever accept this. And I certainly will not."

So, the deadlock is still there and the deal is not finished yet. No matter how much May's done, without that outstanding 5% completed, it's still a no-deal Brexit.

Notes/Observations Asia:

• Italian budget concerns remain on the front burner; recent Moody’s sovereign rating action sooths concerns of any near-term move into junk status
• Central banks are in focus this week – Sweden Central Bank ( Riksbank) and Bank of Canada on Weds) Norway Central Bank (Norges) and ECB on Thursday.
• Key data releases this week see s euro area ‘flash’ PMIs on Weds and US GDP on Friday

Asia:

• China released draft of tax cuts including reduction to cost of housing, education and healthcare in order to boost domestic consumption, to take effect Jan 1, 2019
• China State Council commission on financial development and stability: To balance need for stable growth and preventing risks; reiterates to implement prudent and neutral monetary policy - meeting on fending off financial risks

Europe:

• Moody’s cut Italy sovereign rating one notch to Baa3 from Baa2 (now lowest level of investment grade); Outlook Stable
• PM May: 95% of Brexit withdrawal deal is "now settled". To repeat her opposition to the EU’s proposal for the Northern Irish backstop (Note: reports had circulated that May was prepared to drop demand for time limit on Ireland backstop agreement)
• PM May is facing a rebellion by more than 40 Tory MPs if she doesn’t back down to fresh demands from Brexiteers (Note: 48 votes are necessary for a leadership challenge)

Americas:

• President Trump: Russia has violated arms control treaty (INF) and we are going to terminate it (Note: The INF Treaty is a strategic arms reduction pact that President Ronald Reagan and Soviet leader Mikhail Gorbachev struck in 1987)
• Treasury Sec Mnuchin said to be open to changing how US names currency manipulators, which could open the window to official name China as one, which could then become leverage for trade dispute talks

Energy

• IEA chief Birol: Not worried about Saudi Arabia cutting oil exports in response to international pressure on journalist's death
• Treasury Sec Mnuchin: Countries must reduce oil purchases from Iran by more than Obama administration’s level of 20% before they qualify for waivers from US sanction. Did not expect countries that import Iranian oil to reduce purchase to zero in Nov but they will eventually have to go to zero

Macro

• (UK) United Kingdom: The Conservative party's 1922 Committee, formed of backbench members of parliament, reportedly only needs two more letters from party MPs to trigger a no confidence vote in the Prime Minister. This would pave the way for a leadership challenge. PM May is set to make unusual appearance before MPs in the House of Commons today to say that she is 95% of the way towards securing a workable Brexit deal. It remains to be seen whether this will grant her a stay of execution as her Chequers plan remains deeply unpopular among significant portions of both Eurosceptic and Europhile members.
• (IT) Italy: Late Friday Moody's trimmed it's sovereign bond to Baa3, the lowest investment grade, but with a stable outlook. Italy’s government faces a mammoth €270B worth of bond redemptions in 2019 alone. With interest on Italian government debt rising to its highest level in five years and its biggest buyer at the margin over past three years, the ECB, exiting the market, it’s looking like it become a significant issue.

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

• Indices [Stoxx600 +0.22% at 362.02, FTSE +0.26% at 7,066.00, DAX +0.52% at 11,614.01, CAC-40 +0.24% at 5,096.82, IBEX-35 +0.73% at 8,957.30, FTSE MIB +0.66% at 19,205.50, SMI +0.30% at 8,892.50, S&P 500 Futures +0.18%]

Market Focal Points/Key Themes:

• European Indices trade higher across the board, the FTSE MIB outperforms after Moody’s cut the Countries rating the the lowest Investment grade, but put the outlook as stable, helping BTP futures rally.
• On the corporate front low cost Airline carrier Ryanair rises after H1 results and affirmed outlook, while Philips shares fall after missing on the top and bottom line. Daimler trades higher despite cutting its segment outlook. In the M&A space Rallye rises after an offer for a unit; Axis Communication trades higher on a takeover announcement. Fiat rises sharply after confirming the sale of Megnetti Marelli unit to KKR for €6.2B.
  Looking ahead notable earners include Halliburton, Kimberly Clark and Lennox Interntational.
• Consumer discretionary: Ryanair [RYA.UK] +4.5% (earnings), Rallye [RAL.FR] +5.4% (Rallye received offer to sell business unit), Salvatore Ferragamo [SFER.IT] +8% (Chairwoman passes away), Superdry [SDRY.UK] +0.3% (co-founder says company on completely wrong path)
• Financials: Lloyds Banking Group plc [LLOY.UK] +2% (said to prepare dividend increase and share buyback program)
• Healthcare: Koninklijke Philips NV [PHIA.NL] -5% (earnings), NMC Health PLC [NMC.UK] +6% (raised outlook), Galapagos NV [GLPG.BE] +1.8% (new Phase 3 data)
• Industrials: Daimler AG [DAI.DE] +1.0% (segment outlook cut), Fiat [FCA.IT] +4.5% (to sell components business), Leoni AG [LEO.DE] -7% (earnings; outlook cut)
• Technology: Siemens AG [SIE.DE] +1.5% (preliminary agreement with GE), Axis Communications [AXIS.SE] +5% (takeover announcement)
• Materials: Petra Diamonds Limited [PDL.UK] -2.5% (earnings)

Speakers

• Italy Govt to tell EU that it would move forward with its 2019 budget plan. PM Conte confirmed the 2.4% budget deficit to GDP target and believed that the fiscal plan was not reckless. If Bund to BTP spread hit 400bps then spending plan could change
• EU's Moscovici reiterated view of seeking constructive dialogue with Italy on its 2019 budget plan
• Austria Chancellor Kurz: EU Commission must reject the Italian 2019 fiscal plan unless changes are made (**Note: Austria holds the current rotation of the EU Presidency)
• German Chancellor Merkel said not to expect Frankfurt diesel ban to go ahead
• Sweden Acting PM Lofven stated that held talks with Red-Green and Alliance Parties. Situation was hard and complicated to put together a govt
• Russia Econ Min Oreshkin stated that saw GDP growth accelerating in the coming months
• Bank of Japan (BOJ) Financial System Report: Domestic financial system maintaining stability; No sign of overheating from financial activities
• Saudi Oil Min Al-Falih: New OPEC+ oil agreement might be signed on Dec 7th. Saudi oil production likely to be up in near future to 11M bpd, could go to 12M bpd if necessary. Saudi Arabia could not guarantee that oil prices would rise above $100/barrel. Cautioned that too high of price for oil will slow down the global economy and trigger a recession. If 3M bpd of supplies disappeared in 2019 then would have to dip into reserves, could not cover such volume through capacity

Currencies/Fixed-income

• The EUR/USD was slightly lower at 1.1515 after testing as high as 1.1550 as part of the relief rally in the 10Y BTP-Bund spread. Dealers noted that headline risk persisted ahead of the deadline for Italy to respond to the EU Commission's initial objections over the 2019 budget plan
• The implications of Italy's downgrade by Moody's ahead of the review by S&P on Friday remained the major driver for the euro this week. S&P was expected to leave Italy's rating unchanged but to lower the outlook to negative from stable. Dealers noted that the ECB meeting on Thursday was likely to be closely watched for more color on how the ECB would reinvest maturing QE proceeds post December this year (likely end of QE program)
• GBP/USD was 0.2% lower at 1.3050 area as Brexit talks reached an impasse again. December seems to be the new target for a deal. Risks from the UK parliamentary vote seem elevated with more reports circulating that opposition with May own party could prompt a leadership challenge.

Economic Data:

• (NL) Netherlands Sept House Price Index M/M: 0.3% v 1.4% prior; Y/Y: 9.3% v 9.3% prior
• (CH) Swiss Sept M3 Money Supply Y/Y: 2.3% v 2.5% prior
• (JP) Japan Sept Convenience Store Sales Y/Y: 3.5% v 1.0% prior
• (MY) Malaysia Mid-Oct Foreign Reserves: $102.8B v $103.0B prior
• (CH) SNB Total Sight Deposits for Week Ended Oct 19th (CHF): 577.9B v 577.6B prior
• (TW) Taiwan Sept Export Orders Y/Y: 4.2% v 5.5%e
• (TW) Taiwan Sept Unemployment Rate: 3.7% v 3.7%e
• (EU) Euro Zone 2017 Govt Debt/GDP Ratio: 86.8% v 86.7% prior

Fixed Income Issuance

• (UR) Ukraine to sell USD-denominated 5-year and 10-year notes

Looking Ahead

• (PT) Portugal Aug Current Account: No est v €0.8B prior
• (IL) Israel Central Bank (BOI) Oct Minutes
• 05:30 (SL) Sri Lanka Sept National CPI (NCPI) Y/Y: No est v 2.5% prior
• 06:00 (IE) Ireland Sept PPI M/M: No est v -1.3% prior; Y/Y: No est v -0.9% prior
• 06:00 (RO) Romania to sell Bonds
• 06:00 (IL) Israel to sell Bonds
• 06:25 (BR) Brazil Central Bank Weekly Economists Survey
• 06:45 (US) Daily Libor Fixing
• 08:00 (PL) Poland Sept M3 Money Supply M/M: 0.5%e v 0.6% prior; Y/Y: 7.5%e v 7.5% prior
• 08:00 (DE) German Fin Fin Scholz holds Town Hall on Europe's Future in Ludwigshafen
• 08:00 (IN) India announces details of upcoming bond sale (held on Fridays)
• 08:05 (UK) Baltic Dry Bulk Index
• 08:30 (US) Sept Chicago Fed National Activity Index: 0.22e v 0.18 prior
• 08:30 (CA) Canada Aug Wholesale Trade Sales M/M: -0.2%e v +1.5% prior
• 08:55 (FR) France Debt Agency (AFT) to sell combined €3.8-5.0B in 3-month, 6-month, 9-month and 12-month BTF Bills
• 09:30 (EU) ECB announces Covered-Bond Purchases
• 09:35 (EU) ECB calls for bids in 7-Day Main Refinancing Tender
• 15:00 (CO) Colombia Aug Economic Activity Index (Monthly GDP) Y/Y: 2.3%e v 1.9% prior
• 15:00 (MX) Mexico Citibanamex Survey of Economists
• 16:00 (US) Weekly Crop Progress Report

Rome playing chicken with Brussels

Monday has got off to a relatively uneventful start, by recent standards, with the same underlying risks continuing to dominate as markets gradually pare some of the substantial losses of the last few weeks.

The minor developments that we have had in some of the more prominent stories of recent weeks haven’t had much impact on markets at the start of the week. Italy’s budget battle with Brussels is a prime example of that, with reports in recent days suggesting that the government has no plans to reduce its 2.4% deficit target for next year and is instead engaging in a game of chicken with the European Commission.

Coming on the back on one downgrade, with another potentially coming later this week when S&P is expected to release its review, it’s a risky approach from the populist coalition albeit one that is banking on the Commissions desire to avoid stoking further euroscepticism. It’s going to be a fine balancing act, with the next stage likely being the EC requesting that Italy resubmit a draft budget that abides by EU rules. Investors have taken the latest developments comfortably in their stride though with Italian yields actually falling on the day and bank stocks benefiting from the more relaxed mood.

Falih downplays oil weapon

Oil markets have also settled a lot in recent days, having been caught up in the stock market sell-off a couple of weeks ago. Fears about a Saudi oil response to possible US sanctions in the aftermath of the alleged murder of journalist Jamal Khashoggi were short-lived and Energy Minister Khalid al-Falih sought to reassure markets on Monday, claiming the country has used it as a responsible economic tool for decades and isolated it from politics. He also stated that there is no intention to repeat a 1973-style oil embargo.

This will certainly reassure people given that prices are already very elevated and the prospect of $100 a barrel oil is no longer particularly outrageous. There does appear to have been a moderating of bullish fever for now but prices are still very well supported and remain at high levels. With Trump also coming across very keen to avoid a tit-for-tat with such an important ally of the US, having so wilfully embraced the Saudi’s assessment of what happened on the day Khashoggi disappeared, I don’t expect this to escalate any further between the two which could be good for oil consumers. It could be even better if the country, as a gesture of goodwill, increases efforts to fill the oil void left by Iranian sanctions.

Week ahead could be very volatile

While the week ahead could be very interesting from both a political and economic viewpoint, Monday is looking rather quiet. No economic data of note and earnings season picking up as the week progresses doesn’t make for a particularly exciting start. That said, with politics being such a big driver of market sentiment this year, market participants will likely remain very vigilant.

As the week progresses things get much more interesting, with the Bank of Canada and ECB announcing rate decisions on Wednesday and Thursday, respectively, US GDP being released on Friday and 160 S&P 500 companies reporting on the third quarter. Monday may well just be the calm before the storm.

Germany's Bundesbank said today that the economy "may have come to a temporary halt" in Q3. The "booming" constructor sector have even "decelerated" after strong Q2. Also, retail sales were "relatively subdued". However, the bank does not expect the pause in growth to be long-lived. And, business expectations the auto sector "rose significantly of late."

Bundesbank expects "economic output to expand considerably again in the current three-month period." The bank also noted "rather sharp fall" in unemployment, which could be attributable in part to "the expansion of labour market policy measures at the end of the summer holiday period."

Full article release here.

The US dollar is once again moving to the upside against the Japanese yen, as rising global equity markets spark a move into riskier asset classes. The USDJPY pair is attempting a bullish breakout above the former weekly high and may soon target the 113.00 resistance level. Only a sustained move below the 112.45 support level can negate the current intraday bullish bias.

The USDJPY pair is intraday bullish while trading above the 112.45 level, key resistance remains at the 113.00 and 113.30 levels.

If the USDJPY pair trades below the 112.45 level, intraday sellers may test towards 112.20 and 111.90 support levels.

The euro is starting to correct lower against the US dollar, after a strong technical rejection from the 1.1550 resistance level during the European trading session. If the EURUSD continues to decline, price may start to form a bearish head and shoulders pattern. Buyers will need to close the daily candle above the 1.1553 level to keep the recent bullish momentum from the double-bottom pattern intact.

The EURUSD pair is intraday bullish while trading above the 1.1500 level, key resistance is found at the 1.1553 and 1.1600 levels.

If the EURUSD pair trades below the 1.1500 level, key support is found at the 1.1480 and 1.1431 levels.